Cryptocurrencies are property, Singapore court rules, as it freezes US$7m in 'stolen' cryptoFri, Mar 04, 2022 - 5:39 PM | UPDATED Sat, Mar 05, 2022 - 9:16 AM
Kelly Ngkellyng@sph.com.sg@KellyNgBT
SINGAPORE'S High Court has allowed an application by an American entrepreneur to freeze over US$7 million in crypto assets he claims had been stolen by unknown individuals and entities.
In a judgement made public on Friday (Mar 4), the court ruled on
2 novel points of law.
First,
cryptocurrencies are a property right and, when stolen, can be be subject to
proprietary injunction.
Second,
the court has jurisdiction to grant interim orders against defendants with unknown identities.
Crypto exchanges were also asked to disclose information that could help recover the stolen assets.
The court heard that before the alleged theft, the plaintiff, who is unnamed in the judgement, had stored his cryptocurrencies in 2 decentralised wallets accessible through mobile apps via a password or biometric keys.
The wallets can also be accessed using "recovery seeds", which typically comprise a sequence of words.
In January 2021, the plaintiff was on vacation with 7 acquaintances in Mexico.
While he was out one night, the plaintiff called one of these acquaintances to help retrieve cash from his apartment which they were residing. He shared the passcode to access the safe over the phone, and the acquaintance had read it aloud to confirm it.
The following night, the plaintiff discovered that his crypto was withdrawn without his knowledge and consent.
Around 110 bitcoin and 1,498 ether were transferred from the 2 wallets in 3 transactions, within 4 minutes.
This amounted to US$7.09 million based on the value of the cryptocurrencies then.
The plaintiff believes the thieves obtained his recovery seeds by accessing the safe after the acquaintance read the passcode aloud. The plaintiff had sought a proprietary injunction and worldwide freezing injunction against the unknown "thieves".
In the judgment,
High Court judge Lee Seiu Kin ruled that cryptocurrencies are recognised as property as they are distinct based on their "computer-readable strings of characters", have exclusive ownership, are "potentially desirable" by third parties, and have "some degree of permanence or stability".
Justice Lee also acknowledged the risk of the defendants further dissipating the stolen assets, which would make it even more difficult for the plaintiff to recover them.
He added that the risk in this case is heightened by the nature of cryptocurrency. "The stolen cryptocurrency assets are susceptible to being transferred by the click of a button, through digital wallets that may be completely anonymous and untraceable to the owner, and can be easily dissipated and hidden in cyberspace," Justice Lee said.
The judge also granted a worldwide mareva injunction that freezes up to US$7.09 million of the defendants' assets.
Justice Lee also ruled that the court can grant interim orders against the defendants even though their identities were unknown when the plaintiff brought his case before the court.
"There is nothing in our Rules of Court that requires a defendant to be specifically named," he said.
The court heard that the plaintiff later managed to identify 2 individuals who are part of the group of crypto thieves and will serve the orders on them via email as their physical whereabouts are unknown.
The plaintiff was also able to trace part of the stolen crypto to 2 wallets held by crypto exchanges based in Singapore but incorporated in Cayman Islands and Seychelles, respectively, a US-incorporated crypto exchange, and a US-incorporated digital payments firm. The 2 US-incorporated entities have wholly-owned subsidiaries in Singapore.
All 4 entities are believed to be "innocent third parties". Nevertheless, the 2 Singapore-based exchanges were ordered to disclose information they had collected in relation to the relevant accounts as well as details of all transactions involving these accounts from the dates the stolent funds were credited against them.
Source:
https://www.businesstimes.com.sg/banking-finance/high-court-orders-freeze-of-us7m-in-stolen-crypto-exchanges-asked-to-discloseCache (Source):
https://archive.fo/5h7AJ
CLM v CLN and Anor [2022] SGHC 46"...40 The important issue which arose here was therefore whether the Stolen Cryptocurrency Assets, being cryptocurrency, were capable of giving rise to proprietary rights which could be protected via a proprietary injunction.
41 It is apposite to first refer to the
classic definition of a property right in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (“
Ainsworth”) at 1248:
it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.
42 In B2C2 Ltd v Quoine Pte Ltd [2019] 4 SLR 17, the Singapore International Commercial Court held (at [138]–[146]) that it was possible for cryptocurrencies to be held on trust, and that the defendant in that case did hold BTC on trust for the plaintiff. In so holding, the court reasoned that cryptocurrencies meet the four requirements set out in Ainsworth and “have the fundamental characteristic of intangible property as being an identifiable thing of value” (at [142]). However, it should be noted that since this point was undisputed by the parties, the court was satisfied that cryptocurrencies could be created as property in a generic sense and left open the question of what the precise nature of this property right was.
43 On appeal however, the parties disputed the issue of whether cryptocurrencies were a species of property that was capable of being held on trust: see Quoine Pte Ltd v B2C2 Ltd [2020] 2 SLR 20 at [137]. The Court of Appeal reasoned that it was unnecessary to consider this issue because even if it was answered affirmatively, there was no certainty of intention to create a trust on the facts (at [144]). Nevertheless, the court canvassed in detail the authorities in support of treating cryptocurrencies as property (at [139]–[143]):
139 There have been some other cases in the Commonwealth that have implicitly accepted that cryptocurrency may be regarded as property, although we are not aware of any court that has attempted to identify the precise nature of the property right if any. In Elena Vorotyntseva v Money-4 Limited and others [2018] EWHC 2596 (Ch), the English High Court issued a proprietary injunction preventing the removal of specific ETH and BTC holdings. In coming to his decision, Birss J observed that there had been no suggestion that cryptocurrencies could not be a form of property. 140 In Copytrack Pte Ltd v Wall [2018] BCSC 1709, the Supreme Court of British Columbia ordered that some C$400,000 worth of ETH be traced, which suggests that ETH was recognised as a species of property susceptible to tracing. The action was brought by Copytrack Pte Ltd (“Copytrack”), a company engaged in the business of digital content management and automated copyright enforcement. Copytrack created its own cryptocurrency, Copytrack tokens, and mistakenly transferred a more valuable cryptocurrency, ETH, to the defendant investor instead of Copytrack tokens. The ETH was then transferred by the defendant to third parties. Copytrack sought to trace and recover the ETH. The court characterised the issue of whether the property law doctrines of conversion and wrongful detention could apply to cryptocurrencies as a “critical issue’” and the “real issue on this application”. While the court did not go so far as to rule on whether cryptocurrencies could, in fact, be subject to specific property law claims, the court held that it would be unreasonable and unjust in the circumstances to deny Copytrack a remedy, and so allowed Copytrack to trace and recover the wrongfully transferred ETH.
141 Academic commentators broadly agree that BTC may be regarded as a property right, although they disagree as to the precise nature of this right. In Jean Bacon et al, “Blockchain Demystified: A Technical and Legal Introduction to Distributed and Centralised Ledgers” (2018) 25(1) Rich J L & Tech 1, the authors suggest (at para 182) that holders of digital tokens such as BTC should be regarded as having a property interest at common law, because they hold a bundle of rights that include the right to control the token. This interest is identifiable through entries on the blockchain, can be transferred by entries of the blockchain, and has a high degree of permanence and stability.
142 To similar effect is Kelvin F K Low and Ernie G S Teo, “Bitcoins and other cryptocurrencies as property?” (2017) 9(2) Law, Innovation and Technology 235 (available at [color=rgba(0,0,255,1)]https://ink.library.smu.edu.sg/sol_research/2806[/color]), where the authors argue that the property right relating to BTC is the right to have one’s public BTC address appear as the last entry in the blockchain in relation to a particular BTC. Such a right provides exclusive control to the holder in the form of universal exigibility and can be seen as involving a true property transfer when one transfers BTC from one’s public BTC address to another’s BTC address.
143 Most recently, the UK Jurisdiction Taskforce (‘UKJT’) chaired by Sir Geoffrey Vos released its “Legal Statement on Cryptoassets and Smart Contracts” (November 2019), where it considered the question of whether English law would treat a particular cryptoasset as property. The UKJT defined cryptoassets as generally having the following characteristics (at para 31): (a) intangibility; (b) cryptographic authentication; (c) use of a distributed transaction ledger; (d) decentralisation; and (e) rule by consensus. The UKJT stated (at para 85) that cryptoassets have all the indicia of property, and that their novel or distinctive features as aforementioned do not disqualify them from being property. The UKJT also stated that cryptoassets are not disqualified from being property simply because they might not be classifiable either as things in possession or as things in action. The UKJT therefore concluded that cryptoassets could be treated, in principle, as property.
Ultimately, the court observed (at [144]) that “[t]here may be much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property”.
44 The plaintiff referred me to the New Zealand case of Ruscoe v Cryptopia Ltd (in liq) [2020] 2 NZLR 809 (“Ruscoe”), where the High Court held, following a comprehensive discussion (at [102]–[120]), that (at [120]):[C]ryptocurrencies meet the standard criteria outlined by Lord Wilberforce [ie, the four requirements set out in Ainsworth] to be considered a species of “property”. They are a type of intangible property as a result of the combination of three interdependent features. They obtain their definition as a result of the public key recording the unit of currency. The control and stability necessary to ownership and for creating a market in the coins are provided by the other two features – the private key attached to the corresponding public key and the generation of a fresh private key upon a transfer of the relevant coin.
45 In this regard, the court examined the
four requirements in Ainsworth in turn:
(a) The
first requirement is that the right must be “
definable” – the asset must hence be capable of being isolated from other assets whether of the same type or of other types and thereby identified (Ruscoe at [104]). To this end, cryptocurrencies are computer-readable strings of characters which are recorded on networks of computers established for the purpose of recording those strings, and are sufficiently distinct to be capable of then being allocated to an account holder on that particular network (Ruscoe at [105]).
(b) The
second requirement is that the right must be “
identifiable by third parties”, which requires that the asset must have an owner being capable of being recognised as such by third parties (Ruscoe at [109]). An important indicator is whether the owner has the power to exclude others from using or benefiting from the asset (Ruscoe at [110]). In this vein, excludability is achieved in respect of cryptocurrencies by the computer software allocating the owner with a private key, which is required to record a transfer of the cryptocurrency from one account to another (Ruscoe at [112]).
(c) The
third requirement is that the right must be “
capable of assumption by third parties”, which in turn involves two aspects: that third parties must respect the rights of the owner in that asset, and that the asset must be potentially desirable (Ruscoe at [114]). The fact that these two aspects are met by cryptocurrencies, is evidenced by the fact that many cryptocurrencies, certainly BTC and ETH, are the subject of active trading markets (Ruscoe at [116]).
(d) The
fourth requirement is that the right and in turn, the asset, must have “
some degree of permanence or stability”, although this is a low threshold since a “ticket to a football match which can have a very short life yet unquestionably it is regarded as property” (Ruscoe at [117]). In this respect, the blockchain methodology which cryptocurrency systems deploy provides stability to cryptocurrencies, and a particular cryptocurrency token stays fully recognised, in existence and stable unless and until it is spent through the use of the private key, which may never happen (Ruscoe at [118]).
46 Having considered the extant case law and especially the analysis in Ruscoe,
I was of the view that cryptocurrencies satisfied the definition of a property right in Ainsworth. The plaintiff was therefore able to prove a serious arguable case that the Stolen Cryptocurrency Assets were capable of giving rise to proprietary rights, which could be protected via a proprietary injunction. I reiterate that the court does not engage in complex questions of law or fact at the interlocutory stage (see [39] above). Hence, the first requirement of showing that there is a serious question to be tried was satisfied..."
Reference: CLM v CLN and Anor [2022] SGHC 46
https://www.elitigation.sg/gd/s/2022_SGHC_46Cache (Reference):
https://archive.fo/wip/o1p8r
